Public pension forum at RIC outlines several different paths for reform

Public pension forum at RIC outlines several different paths for reform

Rhode Island’s structural deficit problem, which includes a $7 billion unfunded state pension liability, has attracted national attention and become a serious issue in recent years. A healthy pension system is funded at 80 percent, and according to EngageRI – a nonprofit organization committed to comprehensive pension reform – the system in Rhode Island is the most underfunded in the U.S. at 48 percent.

This issue took center stage at the second of three Publick Occurrences forums created by the Providence Journal in partnership with Rhode Island College and Leadership Rhode Island to educate and inform the public about current issues in the state.

Brian McDonald, Gina Raimondo and Paul Valletta were on the the first panel at the Publick Occurrences forum

Four hundred people attended the event – “The Pension Puzzle: What Can We Afford?” – in the Nazarian Center’s Sapinsley Hall on Oct. 3. Three questions were discussed: “What is a fair pension?” “What is the impact of rising pension costs across the state?” and “Can taxpayers afford public pensions?”

J. Michael Downey – president of Council 94, the largest employee labor union in Rhode Island – cited the state’s 40-year “free-ride,” where no money was contributed to the state retirement system, as one reason for the enormous debt in the state today.

Brian McDonald, a math teacher in North Kingstown who recently became an assistant principal, referred to an earlier pension reform from 2005 when the General Assembly created Schedule A and Schedule B pensioners.

Older Schedule A teachers who retire at $75,000 will collect 80 percent of their pay per year in retirement, or $60,000, said McDonald, while Schedule B teachers who have been teaching for less than 10 years will only collect 68 percent of their pay.

Therefore, Schedule B teachers will receive nine thousand dollars less per year than Schedule A teachers, said McDonald.

“If you figure someone collects in retirement for 25 years, that $9,000 would be equivalent to $225,000,” he said.

Rhode Island Gen. Treasurer Gina Raimondo, who is presenting a comprehensive pension reform plan with Gov. Lincoln Chaffee to the General Assembly, agreed that the state pension system is unfair to younger workers. Two-thirds of Schedule B teachers’ 9.5 percent payroll deduction goes towards what is called the unfunded liability, for those who are currently retired, she said.

“Nowhere in America, either in public or private sectors, do we ask current employees to pay the retirement cost incurred by the employer, or for employees that have already retired,” argued Downey. “We should not do that in Rhode Island either.”

McDonald suggests that teachers should be able to take their payroll deduction and put it into a 401(k) as part of a hybrid plan to maximize the benefits of compound interest.

Raimondo proposed that solving the pension crisis should be a “shared sacrifice,” fair to both pensioners and taxpayers, while other panelists strongly disagreed with this idea.

“Rhode Island’s work force did not create the current funding problem, the workers did nothing wrong, so why do the proposed changes in the so-called reforms result in hurting the people who have done nothing wrong?” Downey asked, stating that despite Rhode Island going 40 years without paying into the state retirement system, public employees have paid their pensions on time, every time, and will continue to do so.

The actuary has said if no serious action is taken, the pension system for state employees will be out of money in about 30 years, Raimondo said.

“We have a choice. We can fix this pension now and do what’s right and fair for everyone, we can see our taxes double and triple in the coming years, or we can watch the pension run out of money,” said Raimondo, stating that without reform, the pension deficit will have doubled from $300 million to $600 million by this time next year.

Alfred J. Verrecchia, chairman of the board of Hasbro, Inc., said that teachers who put their payroll deduction into defined benefit programs are too much at risk. If the deductions were put into a 401(k) plan, he explained, it would reduce political and market risks, allow employees to have control and security over their retirement and have substantial savings when they retire.

Verrecchia argued that a defined contribution plan would establish an affordable retirement goal that the employer, employee, federal government and Social Security could fund together.

Gina Raimondo

“This is important because it’s not in anyone’s interest to promise anyone a pension that’s simply not affordable, which unfortunately is what has happened here in Rhode Island,” he said.

Westerly Town Manager Steven Hartford advocated for a 401(k) style plan, which has benefited the town’s salaried and administrative town employees since 1986.

Westerly town employees have a six percent payroll deduction and the town contributes an additional 10 percent towards their pensions. Employees are able to control their own funds and receive the money that has been set aside once they retire, he said.

Since the switch, the town has had one of the highest bond ratings in the state, no long-term liability, lower unemployment rates and stronger real estate values than the rest of Rhode Island. Also, Westerly has survived two of the toughest years of the recession without a tax increase, said Hartford.

“The change into the 401(k) was really critical for Westerly. I think that’s what municipalities have to look to, and I think that’s what the state has to look to in the long run,” said Hartford, who is concerned that the continuous growth of unfunded pensions won’t allow cities and towns to provide normal social services.

“We have to look at what the taxpayers can afford to pay, and for us in Westerly, the answer is: we’re at our limit,” said Hartford. “I think that’s true for the rest of the state.”

John Ward, president of the Woonsocket City Council and Lincoln finance director, says his city is facing serious problems due to the rising pension costs.

“Our local support for social services vanished long ago,” said Ward, citing the elimination of their summer parks program and too many burnt-out streetlights as examples.

Since 2003, teacher staffing in Woonsocket has been cut by 20 percent, teacher aides have been reduced by 38 percent and the cost of teacher retirement has increased by a staggering 138 percent, said Ward.

"We have a choice. We can fix this pension now and do what’s right and fair for everyone, we can see our taxes double and triple in the coming years, or we can watch the pension run out of money."

-Gina Raimondo

“We have no time for half measures,” he said. “We need a complete, permanent pension reform that will not only eliminate the projected increase in our pension burden, but reduce our pension cost.”

Paul Valletta, president of the Cranston firefighters union, advocated for another side of pension reform, preferring a defined benefit plan and arguing that the urgency of the pension problem has been exaggerated. Valletta was concerned that pension reform could reduce benefits for those who have already retired.

“You cannot go into the pension benefits of the people who are already retired,” argued Valletta. “It’s illegal, and more than that, it’s immoral.”

One hundred random audience members used iClicker technology to answer the question, “What is a fair pension?” Almost 50 percent of the audience voted for a traditional plan over a 401(k) or a hybrid that combines both.

The second panel was asked to discuss how rising pension costs have impacted cities and towns across the state.

Former State Auditor General Ernest Almonte cited the most recent Auditor General’s report to show how Rhode Island has been affected financially by pension deficits. In the past year, liability in the state has increased by $200 million – just short of $550,000 per day, said Almonte, adding up to more than $3 million per week.

Ernest Almonte

The final panel focused on taxpayers’ ability to afford public pensions. Almonte said a few problems with municipal plans are that they offer benefits that exceed the state plan, have unrealistic rate of return assumptions, lower year-to-year trends and overly generous benefits. He proposed that to solve the pension problem, cities and towns should move their funds to the state treasurer’s office.

“This would increase diversity, reduce risk and reduce overall cost into the critical mass of investments, provide a consistent critical degree of expertise and remove the inappropriate flexibility of the local level,” said Almonte. Most of the audience agreed: 60 percent voted “yes,” to all public pensions being folded into one state system.

Jeanne Gattegno – president and CEO of West Bay Community Action, a social service agency in Kent County – said that rising numbers of people turning to West Bay for help and declining support from private foundations and federal and state municipal governments has caused West Bay’s “safety net” to be “pulled and stretched to be capacity.”

The pension plan is no longer affordable in Rhode Island, said Gattegno, adding that too many funding changes and cuts have already taken place throughout the state.

“This is a rippling effect, it’s a problem that’s well beyond me, but it’s all of our problem and it has to be resolved,” she said.

“It’s a hard pill to swallow, but we’re all going to have to swallow it,” Verrecchia concluded. “The question is, do you want a glass of water with it, or do you want it jammed down your throat?”

The final Public Occurrences forum, “War on Terror: Coming Home” will be held on Nov. 7 from 6-8 p.m. in the Nazarian Center’s Sapinsley Hall.